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High Income Households Paid an Effective Tax Rate 16 times Higher than Low Income Households in 2010

By: Kyle Pomerleau

Last week, the CBO released a report titled “The Distribution of Household Income and Federal TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es, 2010.”

In this report they measured the distribution of the federal tax burden by income quintile in 2010, compared it to previous years, and discussed how tax changes will likely change this distribution in 2013. They find that higher income households pay much higher effective tax rates than lower income households.

In 2010, the average effective tax rate for all households was 18.1 percent. This is the average combined effective rate of individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. es, social security taxes, corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es, and excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es. The top income quintile paid an average effective tax rate of 24 percent. The lowest quintile had an average effective rate of 1.5 percent. The top quintile’s effective tax rate of 24 percent is 16 times higher than 1.5 percent for those in the lowest quintile.

From the CBO: “Higher-income households pay much more in federal taxes than do their lower-income counterparts: They have a much greater share of the nation’s before-tax income, and they pay a much larger proportion of that income in taxes. Households in the top quintile (including the top percentile) paid 68.8 percent of all federal taxes, households in the middle quintile paid 9.1 percent, and those in the bottom quintile paid 0.4 percent of federal taxes.”

They also found that taxes changed the distribution of after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income. . “Households in the bottom four quintiles received shares of after-tax income that were about 1 percentage point greater than their shares of before-tax income. For example, households in the bottom quintile received 5.1 percent of before-tax income and 6.2 percent of after-tax income, and those in the middle quintile received 14.2 percent of before-tax income and 15.4 percent of after-tax income. In contrast, households in the highest quintile received 51.9 percent of before-tax income and 48.1 percent of after-tax income.”

Since the mid-1980s, the average effective rate for all income quintiles has declined except the top 1 percent, whose effective tax rate is higher than it was in the mid-1980s.

The CBO predicts that the average effective tax rate for high income households will increase due to the expiration of parts of the Bush Tax Cuts and new Obamacare Taxes.

It is also important to remember that this does not include the effective tax rate on state and local taxes. These taxes happen to be more proportional than federal taxes and thus result in higher effective tax rates for all households.

To read more about the distribution of who pays taxes see our Chart Book and our new study “The Distribution of Tax and Spending Policies in the United States.